Entity Selection and Restructuring

What type of entity is right for you?

Becoming a business owner? Congratulations!

Let’s start with what you are trying to accomplish to determine what type of entity is right for you. The structure of your entity will be affected by your business’ method and rates of taxation, how many owners will you have and what type of ownership, record keeping, and even the lifespan of the business. 

Make it Official

Sole Proprietorship & Doing Business As (DBA)

A Sole Proprietorship is a common option and straightforward to establish. What’s important to know is that this structure does not separate your company from your personal liabilities. If your company was sued or goes into default with creditors, your home, vehicle, and any personal assets are at stake as they’re considered part of your business. We’re not trying to scare you but want you to know what is at stake here for you and your family. 

Limited Liability Company (LLC)

Depending on the elections made while establishing your LLC such as the number of members, the IRS will treat an LLC either as a corporation, partnership, and/or as part of the owner’s taxes. Because the IRS does not recognize an LLC, the LLC can then be taxed as a C Corporation, S Corporation or Partnership. In contrast to a Sole Proprietorship, an LLC, Corporation and Partnership can separate your personal assets from the assets of the company, however, in the case of the Corporation or Partnership, you will be required to file 2 separate tax returns: one for your business and one for your personal taxes.   

Partnerships

A partnership is a formal arrangement by two or more members to manage and operate a business and share a percentage of its profits and liabilities. 

One of the biggest benefits of this business arrangement is that it is a flow-through entity.  Therefore, any income generated in a partnership is treated as the personal income of the partners. This means it is only taxed once. In contrast, owners of a C Corporation face double-taxation.  This is because the corporation’s income is taxed once, and then the distribution of income is taxed as a dividend to the individual. 

There are different types of partnerships and each has it own advantages and disadvantages.  If you’d like to learn more about General Partnerships, Limited Partnerships or Limited Liability Partnerships, please reach out to us to discuss further.

S Corporations

S Corporations are an attractive option because they reduce employment taxes for the self-employed (15.3%). Another characteristic of a S Corporation is income, losses, deductions, and credits pass directly to shareholders, without paying any federal corporate tax at the entity level—something known as a “pass-through” entity. Shareholders of an S Corporation report income, gains, and losses from the S Corporation on their individual tax returns, and pay taxes at their ordinary income tax rates. Since the money comes to them free of corporate tax, S Corporations avoid double taxation on any income or earnings. In addition to alleviating the 15.3% self-employed tax charged to LLC’s and Partnerships.

Aside from its tax status, you must observe internal practices and formalities such as a board of directors, write corporate bylaws, conduct shareholders’ meetings, and keep minutes, and shareholders are required to be on payroll.

Considering a change?

With the prior implementation of new tax laws, many business owners made a change to their entity structure to take advantage of the reduced corporate tax rate. While this is enticing, keep in mind that corporations are double-taxed; first on the profit at the corporate level then second on the money pulled out as the company dividends.  Know the choice to make a change isn’t always cut and dry. Potential benefits and disadvantages depend upon your income level among a number of other unique facts. 

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What we do

When it comes to choosing the type of business structure that’s right for you, PE CPA can help counsel you on the right choice to achieve your long-term financial goals based on where you are today. So you know the cost involved, we provide a flat up-front price for whatever entity best fits your business. Whatever scenario you choose, our team is prepared to ensure all tax documents are filed properly with the state and federal tax authorities.  PE CPA offers complimentary consultations to new clients. Together, we’ll delve deeper into this topic with you, explain more about other entity options available to you, and answer any questions you may have.

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